Stocks — Part V: Keeping it simple, considerations and tools

What I’m going to share with you in these next couple of articles is the soul of simplicity. With it you’ll learn all you need to know to produce better investment results than 80% of the professionals and active amateurs out there. It will take almost none of your time and you can focus on all the other things that make your life rich and beautiful.

How can this be? Isn’t investing complicated? Don’t I need professionals to guide me?

No and no.

Since the days of Babylon people have been coming up with investments, mostly to sell to other people. There is a strong financial incentive to make these investments complex and mysterious.

Babylon

But the simple truth is the more complex an investment the less likely it is to be profitable. Index Funds out perform Actively Managed Funds in large part simply because Actively Managed Funds require expense active managers. Not only are they prone to making investing mistakes, their fees are a continual performance drag on the portfolio.

But they are very profitable for the companies that run them and as such are heavily promoted. Of course, those profits come from your pocket. So do the promotion costs.

Not only do you not need complex investments for success, they actually work against you. At best they are costly. At worst, they are a cesspool of swindlers. Not worth your time. We can do better.

Here’s all we are going to need: Three considerations and three tools.

The Three Considerations.

You’ll want to consider:

In what stage of your investing life are you: The Wealth Building Stage or the Wealth Preservation Stage? Or, mostly likely, a blend of the two.

What level of risk do you find acceptable?

Is your investment horizon long-term or short-term?

As you’ve surely noticed, these three are closely linked. Your level of risk will vary with your investment horizon. Both will tilt the direction of your investing stage. All three will be linked to your current employment and future plans. Only you can make these decisions, but let me offer a couple of guiding thoughts.

Safety is a bit of an illusion.

There is no risk free investment. Don’t let anyone tell you differently. If you bury your cash in the back yard and dig it up 20 years from now, you’ll still have the same amount of money. But even modest inflation levels will have drastically reduced its spending power.

If you invest to protect yourself from inflation, deflation might rob you. Or the other way around.

Your stage is not necessarily linked to your age.

You might be planning to retire early. You might be worried about your job. You might be taking a sabbatical. You might be returning to the workforce after several years of retirement. Your life stages may well shift several times over the course of your life. Your investments can easily shift with them.

If you don’t yet have yours, start building it now. Be relentless. Life is uncertain. The job you have and love today can disappear tomorrow. Nothing money can buy is more important than your fiscal freedom. In this modern world of ours no tool is more important.

Don’t be too quick to think short-term.

Most of us are, or should be, long-term investors. The typical investment advisor’s rule of thumb is: subtract your age from 100 (or 120). The result is the percent of your portfolio that should be in stocks. A 60-year-old should, by this calculation, have 40% in conservative, wealth preserving bonds. Nonsense.

Here’s the problem. Even modest inflation destroys the value of bonds over time and bonds can’t offer the compensating growth potential of stocks.

If you are just starting out at age 20 you are looking at perhaps 80 years of investing. Maybe even a century if life expectancies continue to expand. Even at 60 and in good health you could easily be looking at another 30 years. That’s long-term in my book.

Or maybe you have a younger spouse. Or maybe you want to leave some money to your kids, grand kids or even to a charity. All will have their own long-term horizons.

Once you’ve sorted thru your three considerations you are ready to build your portfolio and you’ll need only these three tools to do it. See, I promised this would be simple.

1. Stocks. VTSAX (Vanguard Total Stock Market Index Fund) You’ve already met this fund in earlier posts of this series. It is an index fund that invests in stocks. Stocks, over time, provide the best returns and with VTSAX, the lowest effort and cost. This is our core wealth building tool and our hedge against inflation. But, as we’ve discussed, stocks are a wild ride along the way and you gotta be tough.

2. Bonds.VBTLX (Vanguard Total Bond Market Index Fund) Bonds provide income, tend to smooth out the rough ride of stocks and are a deflation hedge. Deflation is what the Fed is currently fighting so hard and it is what pulled the US into the Great Depression. Very scary. The downside for bonds is that during times of inflation and/or rising interest rates they get hammered.

3. Cash. Cash is always good to have in hand. You never want to have to sell your investments to meet emergencies.

Cash is also king during times of deflation. The more prices drop, the more your cash can buy. But idle cash doesn’t have much earning potential and when prices rise (inflation) its value steadily erodes.

We tend to keep ours here: VMMXX This is a Money Market Fund and time was they offered higher yields than banks. These days, with interest rates near zero, not so much. Now we also keep some in our local bank. If you prefer, an on-line bank like ING works fine too.

So that’s it. Three simple tools. Two Index Mutual Funds and a money market and/or bank account. A wealth builder, an inflation hedge, a deflation hedge and cash for daily needs and emergencies. Low cost, effective, diversified and simple.

You can fine tune the investments in each to meet the needs of your own personal considerations. Want a smoother ride? Willing to accept a lower long term return and slower wealth accumulation? Just increase the percent in VBTLX.

Next time we’ll talk about a couple of specific strategies and portfolios to get you started.

Meanwhile, a brief note on….

You will have noticed Vanguard is the company that operates all of these funds. It is the only investment company I recommend, and the only one you need (or should) deal with. Vanguard’s unique structure means that its interests and yours are the same. Vanguard the company is owned by the Vanguard funds. In other words, by us, the fund shareholders. This is unique among investment companies.

Awhile back a commentator on Reddit, referring to one of my posts, said: “This really just looks like a commercial for Vanguard.” I can see his point, although I wish he’d made it directly on here.

I am a huge Vanguard fan, but I am not on their payroll and I have no financial interest in the company other than owning the funds I describe.

You might find an index fund in another investment company that is a bit cheaper. They create some as “loss leaders.” But you can’t trust these other companies long-term. Their interests are not your interests. Their interests lie in making money for their owners.

If you play with snakes, to quote Dave Ramsey, you’ll eventually get bitten.

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Comments

Hey great blog! I have been following the investing series and you offer some great advice. Quick question, I usually use ETFs instead. In this case I use VTI, BND, and VNQ which appear to be the ETF equivalents of the mutual funds above. What are you thoughts on this? Thanks.

…and thanks for your kind words. Glad you are finding some value here.

My only quibbles with ETFs (exchange traded funds) are minor:

There can be a fee to buy and sell them.
They are designed for and encourage frequent trading.
They are unnecessary other than for lining the pockets of investment houses.

That said, if you understand them and prefer to execute your strategy with them Ok by me. As with all investment vehicles I would look to Vanguard for them, as you have with VNQ (REITs), VTI (stocks) & BND (Bonds)

I am 30 years old but somewhat conservative when it comes to investing. I am currently 60% VTI, 25% BND, and 15% VNQ. I have recently increased my allocation of VNQ and backed off a bit with VTI given the run up. By the way, I completely agree with your call on Vanguard. Nothing else compares.

I am so glad this is the first comment on here. I’m struggling with which version of the Vanguard Stock Index to invest in. I wanted to do the admiral shares, but that would exceed the max contributions in my traditional IRA ($10,000 minimum), so I thought about ETFs for the lower expense ratio, but now I’m wondering if there is a hidden fee I’m not aware of??

Currently, I have $2,000 invested in a Vanguard target retirement fund, but I wanted to put the other $3,500 in the stock market index. If I go with the VSTMX, then the expense ratio is 0.17%, compared to the 0.05% of the VTI or VSTAX. Not cool!

I also have a brokerage account in which I’ve already purchased $500 in VTI. I suppose I could just keep going that route and stick with the target retirement fund in my IRA. Afterall, I’ll be maxing that IRA out within months each year, so I’ll need additional investments anyway.

FYI, I’m 31 and just starting my investing journey. (I started a little late.) The only debt I have is a mortgage.

Any sage advice on what version of the index to purchase with which account? I’m new at this. Thanks in advance.

What do you mean by “They are unnecessary other than for lining the pockets of investment houses?” Also, what do you mean when you mention possible commissions buying and selling them? I am currently under the impression that if you buy VTI through Vanguard, there are no fees associated with buying or selling as they allow free access to their funds. Am I mistaken? Or when you say “possible,” do you mean only if you’re purchasing VTI through a company other than Vanguard?

Looking online and doing a comparison between Vanguard and American Funds, American Funds outperformed the top Vanguard Index Funds, even after the loads. I will concede that I did this comparison when I shifted from Vanguard to American Funds some time ago, but what say you?

Funds that charge a “load” (sales commission) are aggressively sold by investment advisors. That money, about 5%, goes right out of your pocket and into theirs. Not surprisingly they’ll have nifty charts, brochures and sales pitches to show why this is a good idea. It’s not. Recovering from a upfront load hit is a tough road.

Never buy a load fund.

But this is now water under the bridge and the question is what to do with them now that you own them.

Since load funds are such a horrible idea, I’ve not bothered to look at them much of late. That said, I seem to recall that American Funds are actually not too bad once you get past that hideous load deal.

What you might do is to look at their current expense ratios and performance.

For instance, popping over to their website, I see the Growth Fund of America. Its expense ratio, at .68% is one of the lowest in the family and not bad for an actively managed fund. But it is ginormous compared to the .06% of VTSAX. That’s a huge drag over time.

American Funds are a classic example of a fund company run for the benefit of its owners, rather than its investors. They pay, with your money, sales people to push their funds. That gives them more money under management and that generate more fee income for them. All at your expense.

Hey JL,
What about Vanguard Admiral vs Investor funds, VTSAX vs VTSMX? With only $20k to start investing with, the $10k opening for the Admiral fund means I only have $10k to put in bonds, REIT, or somewhere else, which is why I’m thinking to start with $5k in VTSMX, and as I save more, eventually putting it over into VTSAX. (Same thinking applies to the other fund types.)

Also, what about international funds? With the current European situation, the int’l funds don’t seem to be doing so well, but what over 5, 10, 15-year periods? And Asia (well, China), is on the rise, too, no?

You are right. Each of the funds I’ve mentioned are part of Vanguard’s Admiral Shares series. Basically they have rock bottom costs but it requires 10k to buy in. Not to worry.

Each of these funds also has what they call Investor’s Shares. The fund holdings are exactly the same as in Admiral, but the expenses are a bit higher. But the buy in is only 3k. Once you go over the 10k threshold you can convert and the conversion is NOT a taxable event. So the Investor Share versions work just fine.

Regarding international funds you can certainly add them if you’d like. Vanguard offers International Index Funds. I don’t bother for these reasons:

1. The US is still the dominate world economy and, in my view, will remain so for the next 100 years and counting. That dominance will shrink over time, as it has been doing since the end of WWII, but it is not ending anytime soon.

2. VTSAX is loaded with US companies that are fully international in their operations. Indeed many generate well over half their revenue and profits overseas. So it provides exposure to expanding world markets.

3. This trend will continue to expand as the international economies around the world continue to grow and prosper.

4. Accounting standards and transparencies in the US remain the envy of the world. Less funny business to worry about.

5. Direct international investing introduces currency valuations into the mix and that is a whole other level of risk that needs to be considered.

Vanguard is my favorite too. I can’t imagine handing my money over to so-called experts on the Wall Street. Most can never even match s & P for the 10 year period. That’s why they only advertise few years of performance. Trust no one. You can’r even trust those old ladies from Beardstown. They were miss calculating their return, and in fact losing money compare to S & P.

those other fund companies also fold their losers into their winners. who can’t put together what looks like a successful fund family like that. more reason for my playing with snakes comment.

Ha! the Beardstown Ladies. haven’t thought of them for awhile.

For those of you who may not have heard of them, a few years back they had a brief moment of fame. They were a group of classic “little old ladies” who had formed an investment club. In short order they were posting gains that put all Wall Street to shame. Media commentators hung of their every sweetly uttered word. Until it came to light that the numbers were fake.

I think it was never clear whether they were cheats or just confused. anyone know?

I’m one of the rabble who landed here via MMM’s blog. Great work! Now I’ve got another place to hang out and feed my dreams. FWIW, I’m 52, so a bit beyond the MMM demographic but find the discussion and attitudes there great.

I’m curious if you’ve ever taken a look at which Fidelity funds might best mimic those you recommend from Vanguard. I’ve been using fidelity a long while now and very much like using their FullView (account aggregator) and planning tools, but would like to understand better how much I might be paying for those in fees vs. moving over to Vanguard, assuming I’m comparing similar types of index funds.

Any input or opinions you have are greatly appreciated, and I’ll be tuning in here from now on! Always enjoy your posts over on MMM, too. 🙂

It has been a long time since I’ve bothered to look at Fidelity so there’s not much I can offer in the way of fund suggestions there.

I do know they have, over the past few years, introduced a line of Index Funds in response to the challenge they faced from Vanguard. Last I looked they had kept their fees on these competitive as well.

If you invest in Index Funds and you are already comfortable with Fidelity, I don’t think you need to move.

My concern would be that Fidelity uses their Index Funds as “loss leaders” and my guess is that once you’re on board they’ll try to entice you into their more expensive and (for them) more profitable offerings.

Index Funds at Vanguard, on the other hand, are the soul of what they do.

Thanks for your reply. Took a look and you’re right – Fidelity offers a line of Spartan index funds that are pretty reasonable. There was a good discussion at the Bogleheads site comparing Fidelitiy’s index offerings vs. Vanguard. The main negative re: Fidelity was the possibility they would raise index fees after luring investors in, and if you then sell to move to Vanguard you’re hit with capital gains. I’m of a similar mind as you; these are loss leaders for Fidelity and directly in competition with Vanguard for investors. I’d be surprised if they decided to give up on the competition and raise fees appreciably, losing a potentially large captive audience for their more expensive funds.

most 401k plans don’t have access to Vanguard. Mine didn’t when I was working. But they are wonderful tools.

Most will have on offer at least one Index Fund tracking the total stock market and/or the S&P 500. That’s what you want.

If your company has a match contribution you’ll want to put at least as much as it takes to get the full match. That’s free money.

If you have more to invest it becomes a question of tax bracket (do you need the deduction) and when you plan to retire. If you’ll be retiring before 59.5 years old you’ll want some investments outside 401Ks and IRAs.

I always maxed mine out and, because of my high saving rate, invested outside of it as well.

Jlcollinsnh,
I have a related question. I worked for a company who used Vanguard for their 401K and I used it while workin for them to invest Roth 401K with company match. The nice part is i work overseas and dont have to pay taxes so doing the Roth is a great little bonus since i didnt pay taxes on that money and wont have to when i withdraw it. However, i have changed companies and the new company uses ING so i have picked a target retirement fund through them. My question is, if i want to retire before 59-1/2, how should i invest my additional savings in the vanguard VTSAX? Just as general savings instead of an IRA so that i am able to withdraw it when i want? So i will start with 10K and then add to it every month. Does it automatically reinvest dividends? then when i am ready to retire, i can live off the dividends and withdraw from the principal at 3-4%?

Forgot one question: When i have enough in the accounts to retire and live off of the dividends and 4% rule, how do i account for income on taxes? Will the dividends and ammount i withdraw be counted as income for that year? I have lived all of my working life overseas and only have to file taxes to show what i made, but never have to pay taxes so i am not up to speed on how it will work when i move back to the states and when i finally decide to stop working and withdrawing money out of the investments before i am 59.

Any money you put in and withdraw from a taxable account is NOT taxed as you have already paid taxes on it.

Any money withdrawn from a tax-advantaged account such as an IRA or 401k is taxed as ordinary income and, if withdrawn before 59.5, subject to penalties.

The exception is a Roth. Since Roths are funded with after-tax money and because of the way the law was written, they are NOT subject to tax on withdrawal after 59.5. It is what makes them a beautiful thing.

You can also withdraw money you contribute to a Roth anytime without tax or penalty. BUT, any dividends or capital gains ARE subject to penalty if taken before 59.5.

so, since i am still living overseas and plan to for at least another year or two, it makes more sense for me to open a general savings (what vanguard calls it) account outside of my 401k and invest the $10,000 in VTSAX. This will be considered i have already paid taxes on this money correct? then open a Roth IRA account and contribute max allowable amount each year in 50% VGSLX and 50% VBTLX. I will also be putting a monthly amount into the VTSAX general mutual fund account to keep it as the bulk of my investment. I am thinking 80% in VTSAX and 10% each in VGSLX and VBTLX since i am 29.

Also, i know you say the stock market always goes up and not to try and time it, but i sure wish it would go down quite a bit right now so i could put in my 10K into VTSAX.

I was wondering if you had some advice for my current situation. I am 24 and I have about $20K in my Roth IRA all in the Vanguard STAR fund. I am looking to invest in the VTSAX going forward, but with the $10K initial requirement I am not sure how exactly. Can I take $10K of the STAR fund and basically just switch it to the VTSAX Fund? If so do you know what if any tax implications or Vanguard fees I would incurr? Also, would I then be able to buy more VTSAX funds, but in a seperate account from my Roth?

First, the STAR fund is a fine choice. Basically it is a “fund of funds” comprised of eleven different Vanguard funds and it has a mix of 60/40 stocks/bonds. The idea is a full and diversified portfolio in one fund, and you never have to worry about rebalancing it. That happens automatically.

It’s expense ratio, at .34%, is higher than VTSAX at .06%, but that’s still low in comparison with most other funds out there.

I would have no problem with you just keeping your STAR fund and adding to it over the next few decades. It should serve you well and with a smoother ride.

VTSAX (100% stocks) will likely give you a greater final return when the dust settles 30-40 years from now, but it will be a bumpier ride.

a mix of 60/40 stocks/bonds, as in STAR, is very conservative for a guy your age.

If you do decide to switch, the process could hardly be easier. You just log on to vanguard.com, go to your account, find the section on exchanging funds and follow the prompts. If you haven’t established your online account, you’ll need to do that first, of course.

If you like you can even call Vanguard and they’ll walk you thru the process.

There are no fees to buy and sell Vanguard funds.

If you are opening your new VTSAX as a Roth account and transferring money from your current STAR Roth, there is no tax conscience.

If, however, you are taking money from the Roth to open a VTSAX (or any other) investment outside the Roth there will likely be tax consequences. Not a good idea.

Of course, you can always open a new VTSAX account with money NOT in your Roth. No problem.

Thanks so much for the quick response! I think I will start putting more of my contributions in the VTSAX fund, mainly because as you mentioned the STAR fund seems a little to conservative for me right now, although the last time I checked their returns the STAR fund had actually slightly outperformed the VTSAX over the last decade.

Albert is right. You subtract your age from 100 to get the percentage that should be investing in stocks. This means a younger person, say 20, should buy more stocks and less bonds. As you get older, you should generally buy more bonds and less stocks. It makes sense as stocks are generally more volatile and risky. A younger person has more time to recover from stock losses. That is the theory at least.

Would you compare TRoweP to VAnguard? Spouse invested with TRP for years and managed my IRA. Since his passing, looking at my finances and reading your blog and Q&A I don’t know where to begin, how to compare the two companies. You certainly make a strong case for V.

Very sorry to hear of your loss. My condolences. That’s tough on so many fronts, including sorting out finances. This is just one more reason I am such a strong believer in simple investing.

I am a huge Vanguard fan and all other things being equal it is my choice hands down. But in your case, all other things are not equal.

The good news is TRP is a fine company (my favorite actually after V) so you can start by resting easy that your husband chose it. Certainly don’t feel you have to do anything right away. And certainly ignore all the ‘advisors’ who will be knocking on your door with ‘the solution.’

When you are ready, you might want to look at exactly what funds in TRP you have. As with Vanguard, TRP offers low cost index funds and that’s where you want your money to be. For the funds held in IRAs and 401Ks this is easy. You can move the money tax free if you need to.

For investments outside tax advantaged accounts, you’ll want to be more careful. You could be in a less than ideal fund but facing a large capital gain if you move it.

I hope this helps. Please feel free to check in again if you have more questions.

First off, you’re running a terrific blog. Thanks and kudos to you for sharing great information. This blog is one of the best that I’ve seen on these topics.

I just wanted to pick your brain on something. I’m quite interested in investing in Vanguard index funds, but my situation is a bit tricky. I’m currently working in a foreign country (but a US citizen).

I don’t think I’ll be returning to the States in the foreseeable future–which is sad, but it is what it is. I pay my taxes here locally; that is, I don’t pay taxes in the States. So, that precludes me from enjoying non-taxable/tax-deferred/retirement accounts like IRA or Roth-IRA.

In other words, I can only go for taxable accounts. As I understand–and correct me if I’m wrong–if I want my investment to be tax efficient, I should avoid putting money in bonds- (e.g., VBTLX) or real estate-based (VGSLX) index funds with taxable accounts, as dividends/returns from them are taxed at a higher level, compared to stock-based index funds.

Assuming my understanding is basically correct, that leaves me with the VTSAX or similarly comprised index funds as the only option. I would still be willing to invest in such index funds, but putting money in only stock-based index funds seems to be insufficiently diversified (although they are, of course, well diversified across different stocks).

In a situation like this, do you know of any other way to hedge against other risks, such as inflation or deflation? Or, would you say one should disregard the tax considerations in cases like this? I would be happy to hear your thoughts. Thanks! All the best. –CG

VBTLX and VGSLX are considered tax inefficient because they throw off dividends and interest.

VTSAX has a modest dividend of around 2% these days and importantly as an index fund does little trading. That last means little or no taxable capital gains distributions at the end of each year.

Runaway inflation and deflation are the two economic events that can cause real havoc. But these are also rare events. VBTLX and VGSLX are my favorite hedges for such things and if hedging is important to you I’d say it trumps the tax consideration.

But I didn’t bother with them until I was older, retired and the income was more attractive. Were I younger, VTSAX is all I’d own. Wild ride, but the best performance potential over time. But I have a very high risk tolerance and a willingness and ability to ride out the crashes I know will come and that I know are normal.

Hope this helps!

BTW, if you don’t mind saying, where are you located and what took you there?

thanks for the insight! It makes a lot of sense. I can only go with a taxable account with these investments anyways, so I’m just trying to maximize within the given constraints.

I absolutely do not mind. I’m in Taiwan. I’m a junior faculty at a university here. I joined the faculty last year. As for what took me here, as you may know, academic jobs are extremely scarce and poorly distributed, especially if you’re looking for a tenure track position. When you get an offer, you basically take it, no matter where the location is. 🙁

The academic salary here is low (I guess that goes for pretty much anywhere), but it’s a stable career compared to many others out there. That means I feel like I can be quite risk tolerant. I’m trying to set aside a chunk of my salary and invest consistently for a long haul. So, when I put my money in Vanguard index fund(s), I don’t plan on moving it for a very very long time.

Yes, it is. Well, “long-term” commitment for the time being. Being on the tenure track doesn’t necessarily mean that I can’t change school/location, although I would like to stay here at least until I get that tenure. Similarly, I can also move to somewhere else after getting tenured. Of course, there is also no guarantee that I’ll get tenured. So, a lot of things can happen, and I might move out of Taiwan down the road. The other–and more important–reason why it looks like I’ll be committed to this location for a long time is because my wife is a Taiwanese, and she didn’t really want to move to the US. I don’t think she’ll change her mind anytime soon… But, on the bright side, I love it here. It’s a very livable place, and people are nice and friendly. I teach political science.

One small thing… I think that the advisors rule of thumb is that your age or your age minus 20 should be in bonds with the rest in stocks. The way it is stated here you would actually have less in bonds each year that you age. Your point is still completely valid, but I think the rule is backwards.

I was wondering how much of this applies to international investors? I live in Australia. Does “the market always goes up” still apply to the Australian market? It seems to historically, however since it’s such a small slice of the international market I was doubtful it was as secure.

I would like to simply invest in VTSAX, but the vanguard situation is different over here.

Most of those charge a fee of 0.70% or .090%, and they track the Australian share market, not the US.

However there are also ETFs listed at Vanguard Australia – these appear to have much lower pa fees. There is one which is the “total US market” for 0.05% pa! Is buying such an ETF the same as buying VTSAX in the US, or am I missing something?

Sorry for the delay in responding. Hopefully you read the part about my disappearing to Central America for a few weeks.

“The market always goes up” refers to the US stock market, which has the advantage of being such a large and dominate player on the world stage. The same would apply to the world markets overall. I would be hesitant applying the idea to Australia as the economy there is far smaller. I encourage investors outside the USA to consider investing in World Index Funds that include the US market.

VTS, in the second link you provided, is indeed the equivalent of VTSAX and the ER of .05% is great. Be careful, however. Since it is an ETF you might well face commission charges when you buy or sell.

Since you’ve been working your way thru the blog, perhaps you’ve already come across these two posts:

Hi Jim,
Great information and thank you for sharing all this.
I can tell you that with all the career emphasis most folks have, we just don’t seem to wrap our minds around the investing logic until it’s late in the game.
I’m retiring in May this year when I turn 62. I have a pension that will “just cover” my monthly expenses.
I plan to ‘not’ take my social security benefit until I reach full 66yr status. I also have an employer 401K with sufficient funds that is managed by Vanguard. I will likely need to tap into earnings to bridge the gap until I reach age 66.
81% of my holdings are currently invested in company stock (oil) and I’m considering utilizing your “4 tools” advice.
Any advice on how to arrange dividend/earnings income withdrawals and whether to roll into an IRA?
Also I notice you state the rule of thumb for Stock/Bond ratios, but then you say…doesn’t matter. Can you explain why?

Were I in your position I would be VERY concerned about having 81% of my assets in just one stock. Even if I loved that stock.

If this holding is in a tax advantaged account I’d promptly shift it into the broad-based index funds discussed in the post. If not and assuming you have a large capital gain, I’d begin shifting as rapidly as possible consistent with limiting the tax hit as best you can. This, of course, will take a careful analysis of your full tax picture; something well beyond the scope of this blog.

Structuring withdrawals can be almost anything you choose. For us, we first spent down the various investment “mistakes” I’d accumulated. Now we pull what we need each month from our joint VTSAX fund in our non-tax-advataged account. In our IRAs we have more VTSAX along with the bond and REIT funds described above. The dividends from these I have reinvested. We also shift some each year to our Roth IRAs to reduce the amount we have once we hit age 70 and the Minimum Required Distributions (MDRs) kick in. The idea is I’d prefer to pay up to 15% now than 25%+ later.

Once I have to take the MDRs, those will provide our living expenses and our joint VTSAX fund in our non-tax-advataged account will be left alone to grow again.

As you can see, this is all unique to our situation and needs. It may or may not be useful to others.

But I would suggest not worrying about just spending your dividends and interest. Better to look at all your investments as a whole, limit yourself to total withdrawals of 4% or less and take those withdrawals from wherever it makes sense at the time.

I don’t recall saying stock/bond ratios don’t matter. They are a tool for smoothing the ride. Once you stop working and start drawing on your investments, this is important. But while you are still working and adding money to your investments, I suggest toughening up and accepting the wild ride for the greater return stocks provide over time.

I LOVE YOUR BLOG! I have a question for you. I’m 37 years old and work for a Governmental Agency with a Pension. On the side, I contribute some money into a 457(b) plan. I currently have $67,000 in there in a Vanguard Target Date Fund, 2045. The Expense Ration is .18. Now, I understand that this ER is great, but I had a thought…can’t I invest in each of the three index funds that make up the 2045 Target Date Fund and save some on the ER? Am I missing something here!?

Thanks for your blog and for your willingness to share your wisdom with us young, dumb people!

And no one who asks questions is dumb. I wish I’d been smart enough to ask more back in the day. 😉

Anyway, your thinking is spot on. You can absolutely replicate any target date fund using a selection of index funds, and with lower ERs (expense ratios) to boot. You’ll just have to remember to do the rebalancing on your own, something the TDF does automatically for you.

In fact, I just did our annual rebalancing of the three funds described in the post last week. Easy peasy! And fun. At least for me.

Great Blog! I’ve been reading this and MMM and working on getting my financials on a better track (fortunately they haven’t ever been bad, just not as optimized as they could be).

I’m right now looking to get rid of higher expense ratio Mutual Funds. Looking at the Vanguard Funds I’m confused by the existence of:
– VTSAX (appears to be a Mutual Fund)
– VTI (appears to be the ETF version of the same)
– VTSMX (appears to be an more expensive version of VTSAX)

It seems like I could buy VTI and avoid the minimum contribution of the Mutual Fund with no downsides, what am I missing here?

One other question: I currently have my money with Fidelity, which I like their online tools and they let me buy Vanguard Funds and ETFs. Is there an advantage of being a Vanguard customer directly?

I’m so glad I learned about Vanguard and index funds from your blog! I feel so much more comfortable having my money with them than anywhere else now. Thank you for sharing all your wisdom and experience!

I was curious about this:

“With it you’ll learn all you need to know to produce better investment results than 80% of the professionals and active amateurs out there. ”

Index funds make sense to me to use as investment tools, and I’m guessing 80% is a bit of ballpark figure….is this roughly a commonly agreed upon percentage?

Great question and yes, that 80% is a ball park figure based on the many articles on this I’ve come across on this over the years. In fact you can Google this question and find several falling around this percentage. I’m not sure why they vary. Some look at different time frames. Some at different metrics. Some factor in costs, some don’t.

The results are even more shocking. As the article says:
“Barras, Scaillet and Wermers tracked 2,076 actively managed U.S. domestic equity mutual funds between 1976 and 2006.

“And — are you sitting down? Only 0.6% — you read that right, 0.6% — showed any true skill at beating the market consistently, ‘statistically indistinguishable from zero,’ the three researchers concluded.”

On reflection, calling the out-performers at 20% I am too generously off the mark. 🙂

After reading very informative (thanks for that!) articles on your blog as well as on MMM’s site, I opened an account at Vanguard. Before that I called them several times and I had a good feeling after talking to their people.

Then I got my money ready to be transferred to Vanguard and so I attempted to link my banking account to my Vanguard’s account. I just clicked the button “Add bank account” (I don’t remember exact name) and… my account got blocked.

It was three days ago. Since then I called them multiple times a day, every time they take my phone number, tell me that “associate managing my account is not available, but they will live a message and he/she will call me back”. Nobody ever called me since then, instead I keep calling them.

I always heard and thought, and your articles supported that, that Vanguard is a solid company, but so far I have serious concerns. If I am being treated like that when they don’t have my money, I am afraid to think what would happen after I make a transfer.

Vanguard assigns an individual account manager to each investor. I’ve had mine for 20+ years and have never talked to him. As busy as people are these days, the chances of him being available when I call are slim to none. So I don’t bother.

Instead I call the Vanguard number and whoever answers helps me. Almost without exception, these folks have been knowledgable and friendly. On the rare occasion that they can’t answer the question they whistle in a supervisor who can.

The Vanguard website also has a section where you can email your manager. They promise a quick turnaround and the few times I’ve used it, the response, from my manager, has been very prompt. But usually I just call.

So my advice is to abandon the “deal with just my assigned manager” model and go “free-range” 🙂

The other thought I leave you with, is that the Vanguard model and mission is low cost. That savings goes into our pockets. It could be that sometimes, in their drive to keep costs low, they go too far and service suffers a bit in comparison.

Frequently, I’ve heard high praise for the customer service from firms like Fidelity and T Rowe Price. Due to the competitive pressures from Vanguard, both now offer low-cost index funds (sort of loss-leaders to get you in the door), along with their high-profit (to them) high-cost actively managed funds. Could be those high fees allow them to offer a more premium service experience.

If you continue to be unhappy with Vanguard, you might consider them as an option. Just be careful not to get seduced into their high-priced products.

As for that link you provided, I wouldn’t pay too much attention. Vanguard certainly isn’t perfect and I’m sure like any large organization they drop the ball sometimes. But most of the complaints there have the ring of bullshit to me.

Remember that in creating the only investment firm that genuinely aligns its interests with its customers, it has created a lot of enemies in the business. Including legions of money managers who have lost business to them.

The problem is that their “free-range” does not provide any support. They just take my phone number and promise to call back. Last time on my request to talk to a supervisor then they called a team lead who… well… took my number and said that the “associate managing my account will call me back”. How can I argue with that?

To be honest, I was not even aware that I have an “assigned manager” – I’ve never had one in brokerage firms, neither I wanted one. And hearing multiple times about mysterious “account manager” added more into my frustration until your explanation.

I will try to contact them via email, but I am not holding my breath on that too as I emailed them my question about whether I can label my accounts on the website (I have multiple, so I want a better differentiation) last week and still waiting for a response.

Thanks for mentioning alternatives to Vanguard and warnings about high costs. Besides Fidelity and T Rove Price, I will check Dodge & Cox – this name was mentioned a couple of times in discussions that I found after googling for alternatives to Vanguard.

I did not give up on Vanguard yet, but if they won’t let me access my account to transfer my money into it – what can I do?

This is a tough one as in decades of dealing with Vanguard I’ve never had an experience like yours. Nor has anyone I know. Nor can I replicate it.

In fact, I just called them to discuss it. 1-800-284-7245 The “free range” guy I got this time was helpful as always but is as baffled as I.

He did suggest that, if you are asking a complex or technical question, that might require them to take a few days and then get back to you. Other than that, assuming you’re not just yanking my chain, phone calls should work.

I am lucky to have a wife who is better than me and who in 30 minutes can solve a problem that I cannot solve in 3 days. 🙂

My better half called Vanguard and she was able to clear things out:

For many years my wife had individual web account with Vanguard where she had IRA and 401(k) investment accounts. When I opened a new web account for both of us, I used her SSN along with mine, and this is what created a problem.

Apparently, technically Vanguard allows the same SSN to be used in multiple web accounts, but it does not really handle it well. As the result our new account was eventually blocked. At the end of our conference call Vanguard’s technical person (really knowledgeable, unlike others I spoke with) said that he will merge new investment accounts that I created into my wife’s web account, and I will be able to create my personal web account to access them.

In my defense I can say that I did not see any warnings about SSN not allowed to be used in multiple web accounts. On the contrary the customer service people kept telling me that I would have to create individual web accounts for each investment account that I would like to buy the same security for – e.g. 3 individual web (!) accounts (different username) if I would like to have 3 investment (!) accounts holding the same VTSMX security.

I hope this time Vanguard’s tech gave us correct information and within 24 hours we will be able to access our new accounts.

To help others to avoid my experience with Vanguard – don’t open multiple web accounts (different usernames) with the same SSN.

Hey! I’m looking to start investing soon. I’m 27 and recently inherited a large amount of money. I’ve had it in cash for the last year or so, because I just felt like I still had a lot to learn before I would feel comfortable investing. Your blog has taught me so much so thank you!

Over the years I’ve read countless “better index idea” articles including those on the value-weighted approach, so thanks for forgiving me for skipping this one. 🙂

People are forever trying to build a better index fund and, so far, all they’ve come up with are things that work better some of the time. Of course that implies they work less well the rest of the time.

Pure index funds as created by Jack Bogle are beautiful things. I’ve yet to see anything I’d rather have my money in.

I hadn’t heard about this so I reached out to my pal Linda at Vanguard. This is what she had to say:

“Ok, here you go. The reader is referring to our new consolidated account structure, which will enable all clients to hold Vanguard mutual funds in the same account as Vanguard ETFs and other brokerage assets. The aim is to provide additional investment flexibility and more streamlined service, and it is part of a broad effort to simplify the investing experience with Vanguard.

“The new account structure will include:
The ability to manage and view mutual funds, ETFs, and other brokerage securities in the same account.
A streamlined online process to buy and sell investments.
The ability to use proceeds from security sales to immediately buy Vanguard funds—no more 4-day wait.
A single tax statement for tax filing convenience.

“Clients will receive notification from Vanguard —via e-mail, letter, or prompt when they log on to their account—when their accounts become eligible to upgrade to this simplified structure. To avoid disruption to their existing account options, clients will be unable to upgrade until they receive notification of their eligibility. Clients with questions about eligibility are encouraged to call Vanguard for additional information.

“Hope that helps. If not, let me know what else I can get for you.”

Linda

My take: Since I only hold the funds, it won’t much effect me. Although I do have a brokerage account with Vanguard dating back to when I used to buy individual stocks.

For those who it will effect, I can see some advantages in efficiencies with no downsides I can tell.

I’m 23, and about to get into putting more savings into my investment account that my father has been diligently managing since I was very young. It’s an ETrade account, and I was just interested in what your thoughts on ETrade vs. Vanguard were. It seems they both have their pros and cons, and make them almost indiscernable to someone as new to this as me.

As you read the blog further you’ll learn that I see both trading and trying to pick individual stocks (and the associated high costs) as losers’ games. So if, as their name seems to imply, they encourage this I’d not be a fan.

ETrade seems to have a lot of powerful tools for doing as you said…individual investing, something my father does from time to time (his rule of thumb is do exactly the opposite of what he does and you will have success…I like to apply this to everyone, so my views on individual trading and prediction the market are in line with yours). The tools are there if you want them, but you don’t pay extra, so I think from my conversations with my father it is absolutely fine for long-term index fund investing. Thanks for getting back to me, and I look forward to reading more articles!

“The typical investment advisor’s rule of thumb is: subtract your age from 100 (or 120). The result is the percent of your portfolio that should be in bonds.”

Going by that, if I were 20, I’d have 80% in bonds. If I’m 50, I’d have 50% in bonds. If I’m 80, I’d have 20% in bonds. I think it’s the other way around, isn’t it? At least going by the “typical” investment advice. 🙂

Hi Jim,
I currently have VTSMX with Vanguard. Could you explain the diff bet this and VTSAX? I could not find a good reason to switch my investments to VTSAX.
I am a starter at investing. I do have 25k sitting in my bank besides 5k in VTSMX. Should I just dump all that money into a VTSAX fund? should I transfer my money from VTSMX to VTSAX plus add the other 25? can you own those two types of index funds at the same time? I am not sure that’d make too much sense but wanted to know your thoughts on that! thank you again for making investing so simple and understanding. You and MMM are definitely making me feel powerful and secure about investing my money and making my way to being FI asap! thank you so much!

VTSMX is the “investor shares” version of VTSAX. It has a lower entry level, $3000, and a slightly higher expense ratio. But it is exactly the same portfolio. Once your balence reaches 10k Vanguard will roll it into the lower cost “admiral shares” version: VTSAX.

Yes, you can own both at the same time. You can even own multiple VTSAX accounts. For instance, I have VTSAX in three: ROTH IRA, IRA and taxable.

Since I know nothing about you –age, employment, goals, other assets, etc. — I can’t begin to suggest whether you should invest your 25K in VTSAX. But for investing in stocks, that is the tool I use.

Keep reading the Stock Series and you’ll be able to figure out if it is right for you.

Hi Jim,
Thanks for your response and the helpful advice!
I am 41 yrs old, full-time employed (for now). I plan on retiring from full-time by Feb 2017 and do part-time since my husband is 34 and plans on working until he reaches 65! I have no desire to do that and would love to be FI by the time I’m 50.
We have no assets. We do not want to have kids.
Our savings rate is probably 65% of our salaries.
As for the 25k, I would be investing it some time in February… Hope this background helps a little so you can give me some guidelines as to where to put that money. Thank you again!

Based on what you are saying, your 25k sounds like money you are ready to invest for the long-term (think decades). As such, I would use VTSAX.

But, again, read the stock series so you fully understand all this implies. Then you’ll be able to decide for yourself much more reliably than going just based on my reply.

This understanding will serve you well when the market takes one of its inevitable plunges. You’ll be much more likely to stay the course if your own reading brought you to it rather than just my say so.

Thank you, Jim. i just finished reading your series and about to start reading them again. I feel so much more confident about investing thanks to you and MMM.
Looking forward to reading more of your posts!
Have a prosperous and healthy 2015!

Love your blog. Have read and continue to read lots of it. I am from and live in London ,uk. I can’t seem to find the vtsax fund available. The only other one I am considering is the vanguard life strategy 100% Acc in uk which happens to have 40% in the us. Do you have an alternative for your uk audience? What do you think of the life strategy fund?

I’m just getting around to going through the stock-series and I have already learned so much. Thanks for breaking it down to seem so simple….or maybe you just make it look that easy! Anyways I do have a couple concerns/questions regarding this strategy.

If I had the minimum $20,000 to open these 2 accounts VTSAX & VBTLX would I want to open with the minimum for both and then start adding more so to one depending on if I would like to be more aggressive (add to VTSAX) or more conservative (add to VBTLX)?

Do I open one with the full $20,000 and wait on the other?

Is it possible to purchase one with $20,000 initially and then go a % into both funds and adjusting depending on my strategy (is this scenario even possible) I also am questioning whether I open these accounts into a tax-advantage account or not.

I would be in it more so for the long run (30+ years) but since I am already also investing in an Employee match SIMPLE IRA I am unsure of this option as well. If I did go the advantaged route it would be because I would like to have the potential to dip into it (only if worse comes to worse) and not pay huge penalties (in this case I would more than likely go with a ROTH IRA because I believe you are able to withdraw contributions but not interest/dividends).

I also don’t know if it would just be better to first ensure I am maxing out on my SIMPLE IRA before I worry about purchasing Vanguard Funds. (Although I believe I just realized I am paying a huge ER by investing in Oppenheimer Portfolio Series Equity Investor Fund Class C (I’m not to sure I have done correct research on this one fund though.)

(In context I am 27, and currently invest in a employer matched simple IRA. I put 7% in with an additional 3% match on a $50,000 salary. I would like to start investing in other methods and vanguard seems to be the best option. I have a “f-you account” already built up as well.)

As you keep reading many of these questions will be covered and the pieces should fall into place for you.

But let’s look at them in order.

–It depends on the stock/bond allocation you want. Splitting the 20K between VTSAX and VBTLX would give you the 10k minimum you need for each, but with a 50/50 allocation — Not what I’d suggest for a 27 year old.

If you started with 50/50 in a taxable account each adjustment would be a taxable event. Not good.

So, I am about to open VTIVX and switch later to the Admiral Shares ones i reach the minimum amount to do that. Since I am green to the subject what is more profitable for me make monthly contributions or send the check ones a year? And during what time of the year should i open the account? I believe that is better to do that before the dividend date December 31.
I appreciate any advices.

I am enjoying the blog thus far – the amount of work you have put into is an accomplishment in itself – congrats! I found you via gocurrycracker and I have to say, for me the most exciting piece to all this, is finding a community that has a similar viewpoint on finances (which in my opinion means a community with a similar view point on life).

However, I am a skeptic (but then again, so are you 😉 ). Ive read your stock series starting from the first post to know and I jump around to other posts of yours (or others) when they are relevant. I jumped to your post about what if Vanguard gets nuked and I still find myself worried that putting all of my hard-earned, long-hours-worked, time-built cash into one place is a bad idea. Bullets 3 and 4 don’t interest me – I get it. Bullets 1 and 2 should answer my skepticism but “if it sounds too good to be true, it is” keeps me at bay. Couldn’t Vanguard go bankrupt just like TRowe, Fidelity, or any other company out there? Being new to investing (the only investing I’ve ever done was via my employer’s 401k) I am not sure what would happen to my money invested with Vanguard (say 10k in the VTSAX) if something unlikely like the company going out of business occurred. Do you have any thoughts on this??

Be that as it may, I address your question in some detail in point #2 in that post. Not much else I can add. If my comments don’t resonate with you, you’ll have to proceed in whatever other way makes you comfortable.

I am very new to investing and found your series from “Go Curry Cracker.” A question on the VTSAX. Recognizing that buying stocks in that fund are investments in the corporations it represents, what would you recommend as an alternative stock investment strategy if investors have a moral issue with one or more of the corporations? Are there other strategies that are effective for new investors and successful over the long term, but give more flexibility in terms of corporations supported? Thanks for your guidance! I have really enjoyed the series and am learning a lot from it.

What your are asking about is called “ethical investing.” The challenge is that “ethical” means very different things to different people.

In response, the mutual fund industry has created any number of funds designed to meet this need. Some avoid certain industries, some invest according the the guidelines of specific religions, some in accordance with certain principles.

Unfortunately, these tend to have very high expense ratios which are a severe drain on your returns. Plus, they tend to underperform the index funds I recommend both because they are actively managed funds and because whenever you start asking your investments to meet goals other than making money, you put them at a disadvantage.

As an alternative, you could build your own portfolio by selecting individual stocks that meet your criteria. But again, you will almost certainly underperform. The vast majority of stock pickers do.

Since you are new to investing, I suggest you carefully read this Series. Once you have an understanding of the concepts here you’ll have a better idea of if and how you might pursue your own ethical investing strategy and the challenges you’ll face in doing so.

Hi JL, enjoying this series of posts so far. My first investment in an IRA was nearly 20 years ago with Vanguard and I am still with them and like being their customer. While reading your post I started to wonder why you were mentioning them so much and then read your reasons and understand now. My question to you though, which I never asked myself before reading your blog, is why there isn’t another investment company with Vanguard’s ‘unique structure’ if it is such a great and successful company. Any thoughts on why they don’t have an equal competitor? I’m not sure they don’t, I’m just going with what you said about them being unique.

I recently read William Bernstein’s book, “The Intelligent Asset Allocator.” He recommends holding multiple stock index funds of different asset classes so that you can rebalance between them once a year. According to him, this is effectively buying low and selling high (without trying to time the market), and will increase your returns.

What is your opinion on balancing multiple indexes of different stock asset classes (such as large, mid, and small cap indexes) to simulate the same holdings as VTSAX, then rebalancing each year?

I realize buying and selling is a taxable event, but what about in tax-advantaged accounts? As someone who is still working, I would also have the option of rebalancing by adding new money, rather than selling.

Do you think this would produce higher yields? If so, is it enough of a difference to be worth the trouble?

This post solves many doubts related to investments. So simple and so clear! Thank you!!

Just two further questions.
Would you please explain the main difference between VTI and VIG? (no access to Vanguard mutual funds here). I find that VIG might be something in the middle between VTI and BND but I am not really sure.
Finally, is there any chance you might suggest other brokers? I’ve been looking for alternatives for ‘alien non residents’ investors and I think I’ll go for TD Ameritrade (no fees or extra cost – only 9.99 commissions.)

Hi Jim
I find your site via Gocurrycracker and am fascinated by your sharing, though I am not familiarized at all with VTSAX nor possible to invest in it ( No access from Vietnam though). But you have inspired me to be an investor :). I am planning to ask my friend to help open an account at Vangard and invest 100k in VTSAX and do not touch it at all in 15 years. When the number ( in theory) hits 1,620k I will start to retire and live on 4%. Can you give your comment on this, thanks

Thank you so much for all the information that you share on your blog. I am going to start by saying that I am 32 years old , married and without any knowledge about investments besides what I have been reading here (Again thank you).

We would like to start saving/investing for our future, but we never know how to start. Time has been passing and we do not have a real plan to move forward.

If you could help me to start our journey It would be really really appreciated.

This is information may be helpful in order to understand our situation:
– No debt, no mortgage, no kids ,(yet, we are trying right now)
– We have around $3,000 in cash. We save monthly $1,500 that goes to our savings account and we have had until $20,000, but again there is always a good reason to spend it.
– I am enrolled in my company 401K (Charles SCHWAB), but they do not give me any match. Currently I am putting 25% of my salary The balance is around $5,000.
– My husband is also on his company’s 401K, but they match until 5% and he is putting 5%. The balance is around $5,000 as well.
– We are investing 10% of his salary on his company stocks. We do not understand how it works, but apparently when you sell them back , they give you an additional percent of your money.
– His salary is our main income around $100,000 yearly and I am making around $50,000.
– I have an IRA from my old job 401K with $4,000 and he has another one with $2,000.

We were considering to buy a house as an investment, but after reading your blog it seems like a bad idea.

In addition to this, we live in Hoboken, NJ and it is really expensive here. We may need to consider moving in a couple of years in order to save the 50% that you recommend, but right now it is not an option. I am willing to learn and cut some expenses in order to be worry – free in our future. I want a long-term investment and enough money to travel occasionally and be comfortable.

I am sorry for the long post, but we are really lost and I feel if I do not do something soon, It may be too late.

The important thing at this point is you have started thinking about this stuff.

As you continue reading thru this Stock Series, and the related posts, investing and the opportunities it offers should become ever clearer to you. That might also provide some motivation to adjust your spending to free up capital. http://jlcollinsnh.com/stock-series/

Thanks so much for sharing your articles, and wealth of information. My wife and I are looking to start investing, I just have one question. I currently have a Scottrade account and they charge $7 per trade. How do you suggest investing in VTSAX on a regular basis while avoiding trading fees? i.e. if we have $500 to save each month and we want to invest 80% of that it would equal $400 per month. Should we buy $400 of VTSAX each month with a $7 commission fee or wait for a year and purchase $4800 to save on commission fees? By purchasing on a monthly basis we are basically paying 1.75% of the amount being purchase. At a yearly basis its only .14% At what point should you save the money and purchase a larger amount? And how would that change if we could only save $200 per month or less?
Thanks so much for the help,
Greg

Once at Vanguard I’d add to the account as I could, maybe waiting till I had $500 each time to keep the commission cost low. Once you hit $3000 you can transfer to VTSMX and(at Vanguard) add money without commission.

Or just wait till you’ve saved $3000 and open the VTSMX account. At $500 a month that will only take you six months. This might also motivate you to keep your savings rate a bit higher.

I have enjoyed the stock series but still trying to sort things out. I hope I’m not too late! My husband and I are 64 and plan to continue working until 68. Collecting SS at 66.

We just sold all of our mutual funds that was in a managed account FINNALY and will be transferring that money to Vanguard next week. Being this age is a little scary for the future because we fill we haven’t saved enough. I have a few questions so I will give you a little background.

Together we have about 108,000 in Roth IRA’s with 8000 of that in individual stocks.
141,000 in traditional IRA’s. 180,000 is in a 401 target fund (2015) with fidelity. 35,000 in savings. And around 12,00 in individual stocks in a taxable account through a discount broker. Estimated Social Security will be 3,300 together.

We have no debt except for the house and car. Value of the house is 330,00 with 80,00 left on the mortgage with a 2.875% rate. We pay an extra 300 on the principle each month which will have it paid off in 6 years. 9,000 is left on the car and we pay an extra 100 on the principle with the interest rate being 3%.

My husband adds around 11,000 per year to the 401 (12%) with NO match. We will try to fully fund our Roth IRA’s for the next four years.

Here are my questions:

Should we stop adding the extra on the house and car and up the 401 contributions?

We plan on putting 75% of the money that was actively managed in VTSAX and 25% in VBTLX. Is this the correct mix for our age?

Sell the individual stocks in the taxable account? And if so what to do with that money?

Sell the individual stocks in the Roth account and transfer to Vanguard?

I am also worried about taxes in retirement and was wondering if something should be done in the next few years about moving some of the traditional IRA to the Roth.

Unfortunately I can’t begin to answer your questions definitively. Those are choices only you can make. The best I can do is share the posts that might give you ways to think about it and to share what I do. But I’m not you.

3. Sell the individual stocks in the taxable account? And if so what to do with that money?
—If you’ve read the Stock Series you know I believe investing in individual stocks is a loser’s game. Deciding what to do with those you already have is much more difficult.

You have to consider your tax bracket and and gains/losses you have in the stocks. So you’ll have to do some math. But here are some considerations:

1. Figure out how much capital gains you have in each stock.
2. Do any have capital losses you can use to offset the gains?
3 Are they long-term or short term?
4. What is your tax bracket?
5. Can you defer income to 2016 and get down to the 15% bracket?

Where to put the money is up to you. I keep my taxable investments in VTSAX.

4. Sell the individual stocks in the Roth account and transfer to Vanguard?
—As above, this is your call. Personally we keep our Roths at Vanguard and we don’t hold individual stocks in them.

5. I am also worried about taxes in retirement and was wondering if something should be done in the next few years about moving some of the traditional IRA to the Roth.
—http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/

I’m new to the stock series and have moved our investments to 80% VTSAX & 20% VTBLX. My financial planner friends is strongly recommending that we utilize the VBIIX for a bond fund instead of VBTLX. The VBIIX ER is .16 vs .06 for VTBLX. Although the performance of VBIIX is much better at 4.8% over 5 years vs 3.5% for VTBLX. I’m told that the performance out ways the higher expense ratio. I’d be interested in hearing thoughts about this option.

However, remember the performance of all bond funds these last few years has been strongly influenced by declining interest rates. At some point, rates will begin to rise again. While it might, there is no guarantee VBIIX will continue to outperform going forward.

Jack Bogle is fond of saying, “Performance comes and goes. ERs are forever.”

I had a question about the VTSAX. I know that you have the admiral shares as opposed to the investor shares. This seems like a good thing as the ER is lower for the admiral shares. What I am confused about is the “performance since inception” number. I thought this was the same fund so assumed they should be the same, but on the Vanguard site it lists the admiral shares as 5.08% and the investor shares as 9.03%. Why the difference and would it still be best to go the admiral shares path? Maybe this has to do with the investor shares being 8 years older, not sure. I am leaning towards admiral shares due to lower ER but was concerned I may be losing out on 4%.

Thanks! Glad to know that is the case. I am currently in the process of transferring my wife’s and my Roth IRA from American funds to Vanguard and want to invest in VTSAX. Both of these have well over 10k. The sad part is that I was with Vanguard for several years and a financial advisor talked me into transferring to American funds in 2013. Now I have wised up and moving back. Can’t wait to get my money back in the right place. Thanks for all you do, I have learned much from your stock series and gained the confidence to be a successful investor.

How big an emergency fund do you need? This depends on a range of personal factors:

—Is your job secure?
—Do you own a house? (houses are prone to require unexpected and expensive repairs)
—Do you own an older car?

Unless your job is at risk, $10,000 seems a very large EF to me. Maybe something less and the rest into VTSAX.

If you don’t have the initial $10,000 for VTSAX, you can open an account using VTSMX which has only a $3000 minimum. It is exactly the same portfolio with a bit higher ER. But once you hit 10k Vanguard will roll it into the lower cost VTSAX for you.

Dear Jim, More fan mail. In my second reading of the Stock Series I am taking time for the comments for, as you have suggested, the quality of your readers’ comments – and, naturally, of your responses – is outstanding. Thank you.

First of all thank you for this site. I’m sure the concepts here have given me a huge headstart in my life.

I recently started investing but there is still something that’s bothering me in the back of my mind as I read your comment about being bitten by snakes :): I’m not investing through Vanguard but invest in a low-cost ishares index fund through an online broker. Reason I’m doing this is that the ishares fund is a lot more tax efficient than the vanguard funds (no dividend tax because the fund is accumulating dividends rather than distributing. Yes, we have weird tax policies in Belgium).

Do you believe the ishares fund (managed by Blackrock, one of the largest asset management companies in the world) is a safe alternative to Vanguard?

Also, do you think I have to worry about broker (bankruptcy) risk? I invest through the largest online broker in the Netherlands & Belgium so I would assume they are audited sufficiently by government agencies.

What do you think about this article: http://www.retireearlyhomepage.com/vg_tsp.html? I’m not sure if your enthusiasm for Vanguard is warranted. 0.05% expense ratio for VTSAX, which is really more like 0.072% after hidden costs like turnover, commissions, spread, is still much higher than the 0.029% charged by TSP, or 0.02% charged by some corporate 401(k) plans like ExxonMobil’s.

Also, Vanguard’s “owner” don’t really get a say on pay. To quote the article: “Vanguard operates with a big money model closer to what you’d expect to see on Wall Street. The ten “independent” directors on Vanguard’s Board average about $215,000/year in compensation for a part-time job. Vanguard doesn’t disclose executive pay to its owners (i.e., Vanguard’s customers), but Investment Week put Vanguard CEO compensation at $6 million to $10 million in 2007. I suspect run-of-the-mill management entitlement has boosted that to the $10 million to $15 million range for 2013.”

It seems to me like Vanguard’s claim about being different from other mutual fund companies and having its investors’ best interests in mind is just a bunch of BS. Just another snake oil salesman apparently.

TSP accounts are available only to US government employees. As I say on this blog and in my book, they are a wonderful option for those who have access to them and, due to their lower costs, are preferable even to Vanguard.

Some organizations offer institutional versions of index funds in their 401k plans, either by Vanguard or other investment firms. These, too, enjoy exceptionally low costs and, again here on the blog and in my book, I suggest the are preferable to Vanguard in an IRA.

If you have access to neither TSP accounts or low cost institutional index funds thru your 401k, and you don’t like Vanguard, you are free to chose whatever firm you find more appealing.

Hello, new to your blog. No clue about investing, not much clue about retirement plans (only enough to know that I should have one). I have funds in the Vanguard 401K retirement plan through my previous employer (resigned a few months ago), I am thinking about rolling it over to the Vanguard Target Retirement Fund (for lower fees), or should I roll it over to a roth IRA? (does it matter where we open a roth by the way?), or should I have both? Also, since the TRF has total stocks index fund and bonds index fund (along with 3 other funds), is there a reason to invest in a separate VTSAX and VBTLX? I am not too clear on that. My apologies if you already answered some of these questions in the comment section.